UK Corporate Governance Code – Revisions take the long term view

19 May 2014

The UK Financial Reporting Council (FRC)’s consultation on amendments to the Corporate Governance Code (‘the Code’) focuses on sustainability– including having robust defences against risk, aligning executive pay with sustained good performance, and making a specific confirmation about the longer term viability of the business.

More specifically, the current consultation document, published as part of the usual two-year cycle for update the Code, proposes that among other things:

Companies should confirm that they have robustly assessed their principal risks and explain how they are being managed and mitigated

Remuneration policies should be designed with the long-term success of the company in mind

There should be arrangements that will enable variable pay to be recovered or withheld when appropriate, and directors should have to hold shares for a period after they have left the company before cashing them in

As well as making the traditional going concern statement, companies should state whether they believe they will be able to continue in operation and meet their liabilities for a period that they determine but which is expected to be significantly longer than a year, disclosing the underlying qualifications and assumptions.

So, after much deliberation in two previous rounds of consultation on implementing the principles set out by the Sharman Inquiry after the financial crisis, and a lot of (conflicting) pushback from corporates and investors, the FRC is now asking companies to make two separate statements relating to going concern in the annual report.

The first is a financial accounting-based assessment that company will be a going concern for the twelve months following the approval of the financial statements and the second is a broader statement confirming ‘ongoing viability’, which “except in rare circumstance[s]…should be significantly longer than twelve months from the approval of the financial statements”.

The hurdle for making the viability statement is now a “reasonable expectation” rather than a “high degree of confidence” as was proposed earlier, to make the proposals more workable for corporates, while the reinstatement of specific statements on going concern are there to address investor concerns about the last set of proposals. It remains to be seen whether the market will think the compromise is effective.

The closing date for responses to the FRC’s proposals is 27 June 2014 and the revised Code would be applicable for premium listed companies for periods beginning on or after 1 October 2014.